Economic Activities of a Research Organisation (Part II)

Introduction

Member States use extensively the GBER to support R&D schemes. If we exclude the measures that were implemented in the context of covid-19 and now those which are financed by the recovery and resilience fund, not more than a dozen measures have been notified to the Commission for prior approval since 2014.

Therefore, it was rather unusual that in December 2020, France notified to the Commission an R&D measure. Even more unusual were the contents of the measure. Normally, Member States notify specific projects. In this case, however, the French measure concerned an industrial research agreement [abbreviated in French as CRI] between IFPEN and Axens. The Commission approved it about a year later, in November 2021, with decision SA.59170.[1]

IFPEN is the Institut Français du Pétrole Énergies Nouvelles which is a public research organisation with the status of an “etablissement public a caractère industriel et commercial” [EPIC]. Axens is a subsidiary of IFPEN, that pursues exclusively economic activities.

The notified measure is basically the same as a previous measure that was first approved by the Commission in July 2008 in decision SA.20292 and later renewed by Commission decision SA.33491. It eventually expired on 31 December 2020. The current notification concerns a 10-year extension.

IFPEN qualifies as a research and knowledge dissemination organisation in the meaning of point 15 (ee) of the 2014 RDI Framework and is financed by the national budget. It performs independent R&D with the aim of developing innovative technologies and materials in the fields of energy, sustainable mobility, environmental protection and decarbonisation. Axens is the only fully owned subsidiary of IFPEN.

Because of the importance of the case, it is necessary to review it in detail. Therefore, this article is divided into two parts. Part I examines the links between IFPEN and Axens and the Commission’s reasoning why this case falls within the scope of Article 107(1) TFEU. Part II covers the assessment of the compatibility of the aid with the internal market.

[1] The full text of the Commission decision can be accessed at:

https://ec.europa.eu/competition-policy/competition-case-search-0_en

Part II

Compatibility with the internal market

For the purpose of assessing its compatibility with the internal market, the Commission classified the measure as a scheme, primarily because it covered unspecified sub-projects.

The Commission examined whether the measure complied with the requirements of the 2014 RDI Framework.

As is well-known, the Commission has revised its compatibility criteria in order to comply with the 2020 judgment of the Court of Justice in the Hinkley Point C case [C-594/18 P, Austria v Commission]. They are now divided into two conditions.

Condition 1: Contribution to the development of certain economic activity

Identification of the supported economic activity:

“(79) The Commission therefore considers that the notified measure will contribute to the development of certain economic activities of Axens as part of the IFPEN group.”

The aid facilitates the development of the economic activity:

“(80) The Commission considers that the aid facilitates the development of the economic activity if, on substance, the aid changes the behaviour of an undertaking in such a way that it engages in additional activities, which it would not carry out, or would carry out in a restricted or different manner without the aid, […] The aid must, however, not subsidize the costs of an activity that an undertaking would anyhow incur and must not compensate for the normal business risk of an economic activity, pursuant to point 63 of the RDIF 2014.”

“(81) As a general rule, the Commission considers that an aid does not facilitate the development of an economic activity if the works on the relevant R&D activity had already started prior to the aid application by the beneficiary to the national authorities (point 63 of the RDIF 2014).”

The issue of incentive effect is of particular importance here because there is no a priori specification of the projects that will be carried out. The only thing that the Commission could do was to get France to commit to ensure that public money would not subsidise projects that would be carried out anyway.

“(83) In view of the particular nature of the aid measure in question, constituting a framework research agreement on behalf of one single company, covering specific projects until 2030, the Commission notes that […] the French authorities have committed to ensure the presence of an incentive effect at project level, based on a comparison of the situation with and without the aid in terms of the scope of the project, its pace and the increase in the total amount allocated to R&D and include any relevant documentation in the required annual reports details concerning the incentive effect at project level, based on a comparison of the situation with and without the aid in terms of the scope of the project, its pace and the increase in the total amount allocated to R&D”.

Condition 2: Aid which does not adversely affect trading conditions to an extent contrary to the common interest

Positive effects of the aid measures

“(87) At the level of Axens, the Commission takes note that the notified measure is expected to have benefits for the development of its R&D activities … The same positive effects in terms of R&D expenditure, R&D staff and number of patents applies to IPFEN: The French authorities put forward various parameters that indicate the positive effect that the measure had until now for IFPEN. In addition, French authorities stress that the measure has positive spill-over effects to third parties outside the IFPEN group since a number of funded projects also involved – and will continue to involve – collaborations with third parties”.

Negative effects of the aid measure

“(91) In addition, the Commission needs to assess whether and how the aid measure minimises the distortions on competition and trade, section 3 of the RDIF 2014, points 35, 36. In this regard, the Commission considers the following principles:

  1. a) need for State intervention (section 4.2): a State aid measure must be targeted towards a situation where aid can bring about a material improvement that the market cannot deliver itself, for example by remedying a market failure or addressing an equity or cohesion concern;
  2. b) appropriateness of the aid measure (section 4.3): the proposed aid measure must be an appropriate policy instrument to address the contribution to an economic activity; and
  3. c) proportionality of the aid (section 4.5): the amount and intensity of the aid must be limited to the minimum needed to induce the additional investment or activity by the undertaking(s) concerned.”

“(92) The implementation of the scheme will lead to a situation where Axens, being part of the IFPEN Group, receives a selective advantage compared to its competitors. […] where IFPEN enters into contracts with third parties (renting equipment and premises, providing contract research), those services are offered under market conditions only.”

Need for state intervention

“(93) Point 48 of the RDIF requires that “State aid should be targeted towards situations where it can bring about a material improvement that the market cannot deliver on its own”. It is therefore necessary to verify whether the envisaged objective could be achieved without State aid, or whether the efficient functioning of market forces is affected by situations of market failure.”

“(95) The French authorities consider that the financing of R&D projects in the fields of Axens suffers from imperfect and asymmetric information on the financial markets, which leads to a sub-optimal level of R&D activity.” “(96) The Commission acknowledges that private investors may be reluctant to finance valuable projects as R&D activities are characterised by a high degree of uncertainty, even more so when far from market entry as in the case of industrial research. In addition, imperfect and asymmetric information may also hamper access to finance, so that no satisfactory solutions to finance R&D projects is available on the financial markets.”

“(97) The Commission agrees with France that mostly due to imperfect and asymmetric information between the sector and the financial markets, many companies have no satisfactory solutions to finance R&D projects on the financial markets. The Commission concludes that State aid may be necessary to increase R&D in the Union in view of a situation where the market, on its own, fails to deliver an efficient outcome.”

Appropriateness of the aid measure

“(98) According to the criteria set out in section 4.3 of the RDIF 2014, the Commission evaluates the appropriateness of the aid measure among alternative policy instruments and among different aid instruments.”

“(99) As to the choice of the policy instrument, according to point 57 of the RDIF 2014, an important element in this respect is whether and to what extent aid for R&D&I can be considered an appropriate instrument to increase R&D&I activities, given that other less distortive instruments may achieve the same results.”

“(100) There is a general consensus that other policy instruments, while crucial to create an appropriate environment conducive to R&D activities, alone are insufficient to overcome existing situations of market failure affecting the overall performance level, and that specific and well-targeted State aid measures are necessary to compensate for the effects of market failure ensuring innovation in a sustainable way.”

“(101) In addition, as State aid for R&D&I can be awarded in various forms, the Commission has to establish, according to point 60 of the RDIF 2014, whether the Member States ensured that the aid is awarded in the form that is likely to generate the least distortions of competition and trade.”

“(102) The French authorities argue that the notified scheme, taking the form of project-based aid, potentially available for research in the field of Axens over a fixed period of time, is the only appropriate instrument with regard to the objectives of the measure, its expected budget and its conditions of application.”

“(103) The Commission further takes note that the French authorities put forward various parameters which indicate the positive effect that the measure had until now such as RDI expenditure of Axens and IFPEN, an increasing number of research staff employed by IPFEN and Axens or the registration of numerous new patents in the field of new energy technologies.”

“(105) Moreover, France as other Member states, took various measures to support the business R&D effort by various non-aid measures, e.g. by making available research infrastructures, scientific education, dedicated information networks and similar. Nonetheless, there is a general consensus that these measures, while crucial to create an appropriate environment conducive to R&D activities, alone are insufficient to overcome existing situations of market failure affecting the overall performance level, and that specific and well-targeted State aid measures are necessary to compensate for the effects of market failure ensuring innovation in a sustainable way. The Commission therefore considers that state interventions in the form of State aid for business R&D are appropriate.”

Proportionality of the aid measure and cumulation

The assessment of the proportionality of the aid must have also caused headaches for Commission since no specific costs are identified. Not surprisingly, the reasoning in the Commission decision is rather vague.

“(109) Pursuant to point 72 of the RDIF 2014, for any RDI aid to be considered proportional, its amount must be limited to the minimum needed for carrying out the aided activity.”

“(110) Pursuant to point 73 of the RDIF 2014, the aid must be determined in relation to a predefined set of eligible costs and limited to a certain proportion of those eligible costs.”

“(111) The RDIF 2014 defines categories of eligible costs for R&D projects in Annex I and the maximum aid intensities, by category of research, in Annex II. In the case of industrial research and for feasibility studies the maximum aid intensity amounts to 50%.”

“(112) Under the measure scheme, […], eligible costs, that is costs incurred with IFPEN, are only those as set out in the RDIF 2014”.

“(113) The measure is moreover designed and will be implemented to ascertain that the maximum aid intensities of the RDIF 2014 are respected […] Based on the annual reports set up by France, the actual aid intensity has decreased from 14.5% in 2015 to 2.2% in 2019.”

“(114) According to point 83 of the RDIF 2014 aid may be awarded concurrently under several aid schemes or cumulated with ad hoc aid, provided that the total amount of State aid for an activity or project does not exceed the aid ceilings laid down in the RDIF 2014.”

“(115) The aid granted under this scheme cannot be cumulated with other aid and that it will be ensured that effects of the unlimited state guarantee, emanating from its status as an EPIC, to not lead to a situation where aid intensities are exceeded”.

Conclusion on the assessment if the aid affects trading conditions to an extent contrary to the common interest

“(117) The Commission considers that the negative effects on competition and trade are limited by the aforementioned safeguards in place.”

Avoidance of undue negative effects on competition and trade and balancing test

“(118) According to point 94 of the RDIF 2014, for RDI aid to be compatible with the internal market, the negative effects of the aid measure must be outweighed by the positive effects.”

“(119) In points 95 and 96 of the RDIF 2014, the Framework identifies in general terms two main areas of potential distortions caused by RDI aid, namely first, distortions in the innovation process and in the product markets where the R&D results are to be exploited and, second distortion linked to location effects. Section 4.6.1.1 identifies three theories of harm by which the innovation process and product markets could be distorted, namely distortions of the competitive entry and exit processes, distortions of dynamic incentives, and creation and maintenance of market power. Section 4.6.1.2 sets out theory of harm regarding location effects, while 4.6.1.3 identifies situations where no aid can be approved since it would lead to manifest negative effects. For aid schemes, such as the measure at hand, section 4.6.2 identifies the requirements that have to be fulfilled in order to ensure that the negative effects on competition and trade remain limited, in particular where schemes are focusing on certain sectors.”

Limitation of undue negative effects in case of aid schemes

“(120) Section 4.6.2 of the RDIF 2014, following the distortions spelled out in section 4.6.1.1, specifies the requirements under which the negative effects of RDI aid schemes can be considered as being sufficiently limited to be found compatible with the internal market.”

“(121) According to point 106 of the RDIF 2014, notifiable aid schemes must not lead to significant distortions of competition and trade and negative effects must be outweighed by the positive effects in terms of contribution to the objective of common interest. On a cumulative basis, aid schemes might still lead to high levels of distortions (in particular, if focusing on certain sectors), even where distortions are considered limited at individual level. Therefore, as set out in point 107 of the RDIF 2014, Member States must demonstrate that any negative effects will be limited to the minimum taking into account, for example, the size of the projects concerned, the individual and cumulative aid amounts, the number of expected beneficiaries as well as the characteristics of the targeted sectors.”

“(122) According to the submission of the French authorities, the notified measure will have only a limited effect on competition and trade. The French authorities consider that the public support granted to Axens is not, by its nature or proportion, capable of hindering the dynamic incentives of the markets on which Axens is present.”

“(124) The Commission further notes that the public support granted to Axens, by its nature or proportions, is not capable of hindering dynamic incentives in the 25 segments of biofuels and bio-based products. Axens is facing several innovative and powerful players”.

“(125) The expected budget, hence cumulative aid amounts granted to Axens, is unlikely to exceed EUR 10 million per year according to information provided by the French authorities.”

“(126) The Commission therefore concludes that, based on the cumulative aid amount, and characteristics of the market, the negative effects on competition and trade will be limited.’

Location effects

“(127) Pursuant to point 102 of the RDIF 2014, State aid for R&D may affect trade between Members States when it influences the choice of location.”

“(128) The Commission notes that the scheme does not provide for any obligation of Axens to relocate R&D activities to France.”

Manifest negative effects

“(129) Section 4.6.1.3 of the RDIF 2014 identifies certain situations where the negative effects of the aid manifestly outweigh any positive effects, meaning that aid cannot be found compatible with the internal market.”

“(130) In particular, according to the general principles of the TFEU, State aid cannot be considered compatible with the internal market if the aid measure is discriminatory to an extent not justified by its State aid character (see point 104 of the RDIF 2014). The Commission will thus not allow any measure where such measure or the conditions attached to it entail a non-severable violation of Union law. Pursuant to point 104 of the RDIF, this is particularly the case for aid measures where the award of aid is subject to the obligation for the beneficiary to have its central seat in the relevant Member State (or to be predominantly established in that Member State) or to use national products or services, as well as for aid measures restricting the possibility for the beneficiary to exploit the RDI results in other Member States.”

“(131) The French authorities confirm that Axens is neither obliged to have its central seat in France (or to be predominantly established in France) nor subjected to any of the limitations and restrictions mentioned in recitals (128) and (130) of the present decision. Both the Framework Licence Agreement and the Product Licence Agreement provides that products or licenses for patents be made 26 available to all potential customers in a non-discriminatory manner, regardless of their nationality and location”.

“(132) The Commission therefore concludes that the measure does not entail any manifest negative effects.”

Ex post evaluation?

“(139) According to point 121 of the RDIF 2014, the requirement of evaluation will apply only for aid schemes with large aid budgets, containing novel characteristics or when significant market, technology or regulatory changes are foreseen.”

“(140) The Commission considers in this context in particular:

The scheme will be in force for a limited period only, until 31 December 2030. The expected average annual aid budget of the scheme (see recital (44) of the present decision) remains below the threshold of EUR 150 million per annum that the Commission n applies to decide on whether an aid scheme needs to be subject to an evaluation as laid down in point 121 of the RDIF 2014 and Article 1(2)(a) General Block Exemption Regulation. The scheme contains no novel characteristics, and does not focus on research themes for which significant market, technology or regulatory changes are foreseen.”

“(141) Therefore, the Commission considers that it is not necessary to require the French authorities to submit an evaluation plan for the scheme.”

Conclusion

“(134) The Commission therefore concludes that those positive effects of the measure, notably the increase in R&D expenditure, R&D staff, patents both of Axens and IFPEN […] outweigh its potential negative effects on competition and trade.”

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Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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